Venture capitalists fear microfinance is the next sub-prime

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Category : microfinance, news

It’s not often that I’ve heard venture capitalists (VC) and private equity (PE) firms warn that markets might be overpriced and in danger of bursting. So it is with huge interest that I read of such warnings within the microfinance sector in The Times of India.

A survey of 50 VC and PE firms in India found that three-quarters of the respondents fear the sector is getting ‘‘overhyped to a bubble-like proportion’’. It says that microfinance is one of the most attractive financial sectors in India but cautions that there is too much money chasing firms in the sector. The research also says that there is a danger that borrowers are simply taking out new loans to pay off old ones.

One PE manager says that there is a real sub-prime situation in microfinance with asset inflation and over valuations. He adds that the 40 per cent expected returns are not realistic and that a good concept will turn ugly.

This sounds really familiar. Let me think . . . when did we last have an asset bubble where too much money was chasing too many bad borrowers while agents profited from fees? Ah yes, that’ll be the sub-prime crisis from 2007 when the world economy was brought to its knees – hard to forget that really. It’s only a matter of time before the microfinance bubble bursts.

Not that there is a shortage of cash going into the sector – not while there are millions to be made. The Economic Times of India reports that SKS Microfinance chairman Vikram Akula has part sold his stake in the company making a 12-fold profit before the bank’s initial public offer (IPO). Other senior bank staff have also sold shares to realise handsome profits which are thousands of times greater than the microfinance loans offered.

The bank’s IPO is highly contentious. By floating the bank, management will be accountable to profit seeking shareholders rather than making sure that the poorest households are no longer financially excluded. The theory behind microfinance being a tool for poverty reduction has its flaws but the dangers of the poorest being exposed to private credit and shareholders is even scarier to say the least.

There’s very little mention of poverty reduction in many microfinance stories these days and is perhaps a reflection of the real concerns of the sector.

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